Question Tag: One-Off Order

The company is considering the viability of investing in a one-off order outside its normal budgeted routine operation. The Management Accountant is requested to appraise the procurement and sale of some useful medical equipment. The following cost estimate has been prepared by a junior accountant:

1. The steel is regularly used and has a current stock value of N50 per square meter. There are currently 400 square meters in stock. The steel is readily available at a price of N55 per square meter.
2. The brass fittings would have to be bought specifically for the job. A supplier has quoted N800 for the fittings required.
3. The skilled labor is currently employed by the company and paid at the rate of N80 per hour. If this job were undertaken, it will be necessary to either work 100 hours overtime which would be paid at time plus one half (N120 per hour), or hire additional labor at N100 per hour.
4. The company has sufficient unused capacity in terms of general fixed overheads. The junior accountant has made no allocation for fixed overheads.
5. The company’s policy is to add 20% to the production cost as an allowance against administrative costs associated with the jobs accepted.
6. The standard profit added by the company as part of its pricing strategy is N150.

Required:

1. Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimates. (6 Marks)
2. There may be a possibility of repeat orders from your company which would occupy part of the normal production capacity. What factors need to be considered before quoting for this order? (4 Marks)